These three taxes will come into force on 1 August 2012, and the first deferred tax payment will be due on 30 November 2012.

Applicable Regulation

Article 5 of the French Amended Financial Bill of 14 March 2012 (transposed in articles 235 ter ZD, 235 ter ZD bis and 235 ter ZD ter of the FTC).

It is yet unclear whether one or several decrees should be published before the entry into force of the FTT. As at the date of this memo, the French tax authorities have only released in May 2012 a draft decree on the FTT that provides for the taxpayers’ reporting requirements to the central depositary or the tax authorities (amount of the tax owed, trade order numbers, execution dates, trade description); and

Administrative guidelines should be published and provide for some additional details (e.g. on the condition of exemption). In that respect, some more structural changes may be discussed at the next parliamentary round on the French Amended Finance Bill (scheduled to begin in July 2012).

1. Scope of the FTT

The FTT will be levied on transfer for consideration of ownership of equity securities or assimilated instruments admitted to trading on a regulated/recognised market and issued by a French-listed company having a market capitalization in excess of €1bn on the 1st of January of the year during which the transfer occurs.

1.1 Condition on the instrument

FTT is applied on the transfer of ownership of equity securities or securities assimilated thereto (together, the “Eligible Instruments”) that are traded on a regulated or recognised market (the “Eligible Markets”).

(A) Eligible Instruments

(1) Definition

Among financial instruments, article L.211-1 of the French Monetary and Financial Code ("MFC") distinguishes between:

(i) securities, including:

(a) equity securities (titres de capital),

(b) debt securities (titres de créances), and

(c) shares or units in collective investment schemes (“CIS”), and

(ii) financial contracts.

FTT applies to the acquisition of equities securities (titres de capital) within the meaning of article L.212-1 A of the MFC, which cover shares and other securities that give, or may give, access to capital or voting rights.

FTT also applies to the acquisition of securities assimilated to equities securities pursuant to article L.211-41 of the MFC, i.e. all instruments or rights representing a financial investment in an entity and issued under foreign laws equivalent to equities securities. Although ADR fall within such definition, such inclusion remains rather theoretical as ADR on French-listed companies are in practice issued by non-French entities and are therefore outside of the scope of the FTT.

Thus, financial instruments that do not qualify as equity securities or assimilated securities fall outside the ambit of the FTT.

On the basis of the above, securities that do not qualify as equity securities (nor as assimilated securities) fall outside the scope of the FTT. As a consequence, transactions relating to debt securities, shares/units in CIS and/or financial contracts do not trigger the FTT. Convertible and exchangeable bonds constitute equity securities under French law and fall within the scope of the FTT, but benefit from a dedicated exemption to the FTT.

Debt securities: Vanilla bonds are out of the scope of the FTT.

The acquisition of convertible bonds (obligations convertibles) and exchangeable bonds (obligations échangeables), although considered equity securities under French law, benefit from an exemption to the FTT.

Subject to confirmation in its administrative guidelines, the French tax authority orally confirmed that the acquisition of other types of debt instruments such as OBSA - bonds to which a share warrant is attached (obligations à bons de souscription d'action), ORA - bonds mandatorily convertible into shares (obligations remboursables en actions) and OCEANE – bonds convertible into, or against which may be exchanged, existing or newly issued shares (obligations convertibles ou échangeable en actions nouvelles ou existantes) will also benefit from the exemption to the FTT.

The exemption only applies to the acquisition of the bonds: the acquisition of the underlying shares upon exercise/exchange or conversion of the bonds may trigger the FTT if the shares delivered are not newly issued (the acquisition of newly issued shares benefit from another exemption).

CIS’ securities: As the FTT does not apply to unlisted securities (see Section 1.1(B) below), most transaction involving CIS such as UCITS, hedge or private equity funds should not be affected by the FTT.

This said, one may question whether exchange traded funds (“ETF”) structured under a public limited company legal structure model (such as SICAV) should fall within the ambit of the FTT as on the one hand, shares in public limited company qualify as equity securities but, on the other hand, SICAVs are CIS which instruments, in accordance with article L.211-1 of the MFC, falls under a different category of financial instruments (see above). In our view, the nature of CIS should supersede that of the legal structure so that ETF should fall outside the scope of the FTT.

Another difficulty that may well arise in the near future as a result of the implementation of the AIFM Directive is the potential requalification of listed structures into alternative investment funds (“AIF”) that would not otherwise, under the current French legal regime, qualify as CIS. Conversely, one may have an interest in relying on that AIF’s definition to benefit from the exclusion on the FTT benefitting to CIS.

Financial contracts (contrats financiers, i.e. derivative instruments): the entering into a financial contract (such as an equity swap or a CFD) does not trigger the payment of the FTT until shares are actually delivered. Conversely:

(i) cash settled equity derivatives are outside of the scope of the FTT and

(ii) physically settled equity derivatives fall within the scope of the FTT only if, and when, the underlying shares are actually delivered.

(B) Eligible Markets

Eligible Markets are:

(i) French or European Economic Area Regulated Markets (within the meaning of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments- MIFID), and

(ii) "recognised markets" (marchés reconnus), a limited list of markets recognised as such by an order (arrêté) from the Minister of Economy and Finance (the list includes the Swiss stock exchange and various commodities markets, but does not include major stock exchanges such as NYSE, NASDAQ or the Hong Kong Stock Exchange).

Multilateral trading facilities (“MTF”) are not eligible markets (although acquisitions on an MTF of Eligible Securities otherwise admitted to trading on a regulated market will be subject to the FTT).

1.2 Condition on the issuer - Territorial scope

The FTT applies to Eligible Instruments issued by companies having:

a market capitalization in excess of €1bn on the 1st of January of the year during which the transaction occurs; and

their registered seat in France

irrespectively of the location of the purchaser, buyer or financial intermediary.

1.3 Condition on the transaction

(A) Transfer of ownership

The FTT will be applicable to the acquisition of equity securities (and assimilated securities), including upon exercise of option, forward sales and exchanges, when the ownership of the related equity securities (and assimilated securities) are effectively transferred, i.e. when the related equity securities (and assimilated securities) are registered in the acquirer’s financial instrument account.

Consequently, the FTT should apply to the net balance of all purchase and sale orders executed by the same client on the same day (to be confirmed and detailed by the decree or administrative guidelines).

(B) Exemptions

Article 235 ter ZD II of the FTC provides for the following exemptions to the FTT:

Acquisitions made in the context of the issuance of equity securities (primary market), including under underwriting arrangements;

Transactions operated by Clearing house/central securities depositary in the course of their clearing activities;

Market making transactions: Acquisitions by French or foreign financial institutions and investment service providers in the course of their market-making activities are exempt from the FTT.

For the purpose of the FTT, market-making activities are defined as:

(a) the simultaneous issue of a buy order and a sell order of similar size in order to provide liquidity to the market on a regular and continued basis,

(b) the execution as counterparty of buy or sell orders issued by clients, or

(c) the hedging of positions taken under (a) or (b) above.

In respect of prime brokerage activities and give-up agreement, the better view is that these transactions should not trigger the FTT:

o At the level of the client, provided that these transactions should not at any point imply the transfer of the securities subject to the give-up in the client’s financial instrument account; and

o At the level of the prime-broker, provided that the latter enters into the transaction triggering the transfer of the securities subject to the give-up with a view to hedge its risk under the derivative agreement with its client.

Transactions under liquidity contracts: Transactions conducted by investment services providers when acting on behalf of the issuer to provide liquidity on the trading market are exempt from the FTT;

Intra-group transactions and restructuring transactions Certain exemptions are applicable to intra-group transactions such as those between companies that are members of the same group within the meaning of art.L.233-3 of the French commercial code (i.e. between parent companies and subsidiaries in which the former control at least 40% of the voting rights under the Commercial Code rules), transactions between companies that are members of the same tax consolidated group and transfers of ownership resulting from a merger, a contribution or a spin-off, if such reorganization benefit from the favourable tax regime of article 210 A and 210 B of the FTC;

Conditions of application of these exemptions should be detailed in the administrative guidelines.

2. Tax Base and Rate

The FTT is levied on the acquisition value of the Eligible Securities (brokerage fees excluded). In the case of an exchange, each party shall be taxed on the basis of its own acquisition; if no price is mentioned in the contract, the tax base would consist in the quoted price of the relevant Eligible Securities on the most relevant market.

The FTT amounts today to 0.1% of the value of the securities as defined above. However, it is expected that it shall be increased in the near future.

3. Due Date - Payment

The FTT is payable on the first day of the month after the month during which the relevant Eligible Securities were acquired.

The legal taxpayer of the FTT is the broker that executes the purchase order or, if no broker is involved, the bank responsible for the custody of the acquirer’s financial instruments account.

The legal taxpayers should in most of the cases report and pay the tax due to Euroclear France (central securities depositary). Euroclear France should pay back the global amount of the FTT to the French Treasury no later than the 25th of the month following the acquisition date of the relevant Eligible Securities.

4. Entry into Force

The FTT will be applicable to transactions carried out as from 1 August 2012.

The FTT on acquisitions made between 1 August and 31 October 2012 shall be reported, assessed and paid by 30 November 2012.

5. Reinvoicing of the FTT by the Broker to the Client

For the time being, the regulation provides that the broker is the taxpayer of the FTT (see Section 3 above). The French tax authority confirmed orally that issues related to the repayment of the FTT by the client are contractual matters and will not be addressed in the administrative guidelines.

The invoice of the FTT by the broker to the client might be regarded as a turnover and included in its tax base for VAT purposes (to be further discussed).